Blame our politicians for the retirement savings problem

Americans are afraid of having insufficient income in retirement. Maybe they should be, but in most cases, they’re afraid of the wrong things. The main source of the “retirement savings gap” in the United States is not individuals shortchanging their 401(k)s. It’s the government, at all levels, promising retirement benefits without funding them.

Social Security is underfunded by more than $10 trillion for well-known demographic reasons, yet Congress has done nothing for 30 years. State and local governments have overpromised and undercontributed to their public employee pensions. Today, based on some economic estimates, funding shortfalls approach $4 trillion. Estimates of combined unfunded liabilities for Social Security and federal, state and local government employee pensions range from $14 trillion to $26 trillion.

{mosads}By contrast, the household retirement saving gap may be as low as $1 trillion, equal to just 2 percent of total retirement savings. Studies from interest groups such as the National Institute for Retirement Security, the research arm of the public sector pensions industry, garner headlines with claims that 92 percent of households are undersaving with a total saving shortfall of $14 trillion.

But peer-reviewed academic research finds a much smaller problem. A 2009 study by William Gale, John Karl and Ananth Seshadri found that only about 25 percent of households are underprepared for retirement. Just as important, I estimated that even among that 25 percent of undersaving households, shortfalls averaged less than 10 percent. This study won the TIAA-CREF award for the year’s best research on retirement, so its findings should be taken seriously.

Once you open your mind to the idea that Americans may be saving reasonably well, other examples start popping out. Labor Department data show that the average retirement plan contribution today is over 8 percent of employee wages, one-third higher than the 6 percent rate in the 1970s when traditional pensions were at their peak. Likewise, Federal Reserve data show that total retirement savings were equal to only 50 percent of annual employee earnings in the 1970s. Today, retirement plan assets exceed 300 percent of wages, a six-fold increase.

Retirement incomes have also risen sharply. A Census Bureau study finds that from 1990 to 2012, incomes for the median retiree household rose by 32 percent above inflation. Even for lower income retirees, incomes rose by 31 percent. For the lowest income retirees, poverty has fallen as well, from 9.7 percent in 1990 to only 6.7 percent in 2012.

The defining characteristic of public retirement plans is for the government to promise benefits without paying for them. It’s true in the United States and around the world, where a World Economic Forum report finds that 75 percent of retirement saving shortfalls are due to government underfunding. That’s just the incentive politicians face, and we should be mature enough to recognize that.

So there is a major retirement savings gap, but it’s not where news reports would have you think. What are the solutions? First, Social Security should be gradually transformed into a robust safety net that truly guarantees against falling into poverty in retirement, while telling middle and upper income households that they need to save more on their own.

Radical, you say? New Zealand offers a universal flat benefit to all retirees, but doesn’t pay additional benefits to high income households. Likewise, Canada pays substantially lower benefits to middle and high income retirees, while charging lower tax rates on a much lower wage base than in America. We must think creatively rather than being chained to the details of a Social Security program created nearly a century ago.

Second, traditional pensions, whether in the public or the private sector, need to reestablish solid funding or transition to 401(k)-type plans that cannot generate unfunded liabilities. While states have passed modest reforms, their unfunded pension liabilities continue to grow.

Third, while government can facilitate saving by individuals, it needs to be careful. Half of states are setting up plans to automatically enroll workers into individual retirement accounts. Making these plans available is a good idea. But for low income workers, it could backfire. A recent study found that when federal employees were automatically enrolled into a 401(k)-type plan, worker savings increased, but so did their debt.

For workers with less than a high school education, consumer, auto loan and mortgage debt increased by three times as much as new retirement savings. States might consider following the United Kingdom’s lead, which does not auto-enroll employees into a retirement plan until their salaries exceed roughly $10,000.

The United States needs to increase its retirement savings, but it’s mostly not ordinary Americans who are at fault. It’s American politicians, who are better on promising benefits than funding them.

Andrew G. Biggs is a resident scholar at the American Enterprise Institute. He is a former principal deputy commissioner of the Social Security Administration and was co-vice chairman of the Society of Actuaries Blue Ribbon Panel on Public Pension Funding. He currently serves as a member of the Financial Oversight and Management Board for Puerto Rico.